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Tail Risk Parity

Tail risk parity is an investment strategy that aims to balance a portfolio's exposure to tail risks across different asset classes. The goal is to diversify the potential for extreme losses by allocating capital in a way that spreads tail risk more evenly, thereby reducing the impact of rare but severe events. This strategy contrasts with traditional risk parity, which focuses on balancing risk based on volatility rather than extreme, rare events.

Example

A tail risk parity strategy may involve allocating more to assets that perform well during market downturns, such as long volatility products or safe-haven assets, to balance exposure to extreme risks.

Key points

• Aims to spread exposure to tail risks across asset classes.

• Focuses on balancing the impact of extreme, rare events rather than volatility.

• Reduces the likelihood of severe losses from market shocks.

Quick Answers to Curious Questions

Tail risk parity focuses on managing exposure to rare, extreme events, while traditional risk parity focuses on balancing volatility across asset classes.

Assets like safe-haven investments (gold, bonds) or volatility products that can perform well during market downturns are typically included.

To minimize the impact of extreme market events and reduce the risk of large, unexpected losses in their portfolio.